The Myth About America’s Export Deficit

Imagine that the BMW car dealership in a neighboring village — a dealership you knew to be honest — began to sell new, fully loaded BMWs for $30,000 each. The BMW dealership in your village sells the same cars for $50,000, so you went to the next village and paid $30,000 for a BMW. The car was everything you knew BMWs to be — ran great, looked great, no problems — best car you ever owned. So you told your family and friends about it, and they went out, got the same deal, and the same results. Soon, your entire village was taking advantage of the low price to get these great cars. Altogether that year, they spent a total of $300,000,000 buying BMWs in the next village. Everything was great until . . . . Until your village Mayor Trump told you that your village is running a $300,000,000 trade deficit with the next village, and your local BMW dealer was going broke because of the next village’s “unfair” sale tactics. So from now on, to protect the local dealer, Mayor Trump added a 100% import tax to all BMWs brought in from the next village. The results:

1. The neighboring village put a 100% retaliatory tax on the BMWs that your village exports.
2. The next BMW you bought cost you $50,000 if bought locally or $60,000 if bought next door, rather than the $30,000 you formerly paid.
3. You and many of your neighbors decided not to buy cars.
4. Many fewer BMWs were sold in either village: both car dealerhips suffered sales losses.
5. Eventually, one of the dealers went out of business because there wasn’t a need for two BMW dealers in neighboring towns.

Does this scenario sound familiar? The lesson is simple: Tariffs are poison to business. Whether we’re talking about import tariffs (which punish the importing nation) or the rarer export tariff (which discourages exporting), tariffs increase prices and reduce trade. Tariffs transfer money from the public to the government, and if the government happens to be Monetarily Sovereign, the money will be destroyed upon receipt. Reader serenebutterye70be631ba sent us the following comment:

Rodger, will you comment on this video https://www.youtube.com/watch?v=5LJi6iFHqDc, which says the real reason for tariffs is that it’s the only way to keep production in a country or something like that?

The ostensible purpose of tariffs is to discourage imports by raising their price. But the reality is a bit more nuanced than that. My answer to the question was, If, for some reason, one wishes to protect an American business from foreign competition, there are several methods. Here are three of them:

1. Create legislation mandating that the product or service meets criteria that only American businesses can meet. For example, a law saying that all trucks using American roads must be American-made. Bingo. American truck makers are protected.
2. Levy import taxes, which effectively are sales taxes on imported goods. These represent money transfers from American consumers to the U.S. government. It’s a price increase, but worse, it removes growth dollars from the U.S. economy, so it’s recessive.
3. The right way — the best way — to protect a U.S. industry is for the federal government directly to aid the industry by giving it money. Examples are farm subsidies. They not only protect U.S. farmers, but they also lower purchase prices to consumers while adding growth dollars to the economy. While #2 reduces GDP and causes inflation, #3 increases GDP and lowers prices.

(Many trade agreements and laws seemingly prohibit protectionism, but nations generally ignore such toothless regulations, preferring to protect their own interests.) Other protectionist measures that, contrary to tariffs, would benefit an economy would include funding R&D for local businesses, easing immigration laws to gain employees, funding training and education for local employment, eliminating FICA to reduce business costs, funding Medicare for All, etc. If Trump and his advisors cared about the U.S. economy, they would choose #3, but that would help narrow the income/wealth/power Gap between the rich and the rest — the last thing the rich want to do. So, we have Trump’s ridiculous tariffs, which are inflationary and recessionary, while punishing the middle- and lower-income people, and widening the Gap. Sadly, the populace does not understand this, and the people pay the price. Ignorance is expensive. Importing more than we export is neither bad nor good. It merely means we exchange our dollars for goods and services. You exchange more dollars with your local retailers than you receive from them. In short, you run a trade deficit with almost every supplier of products and services — your grocer, your gas station, your maid, etc. Is this bad? No, it just means it’s easier for you to obtain dollars than to make the goods and services. You would rather work at your current job than try to build a car, so you work for dollars, which you exchange for a car. If the government wanted to protect the car industry, it could send you a coupon good for $xxx dollars when you buy a new car. That would boost car sales and stimulate GDP. By contrast, puttingariff on car imports raises all car prices and takes dollars from the economy. The choice is clear (except to politicians, media, and economists who don’t understand Monetary Sovereignty — the government’s infinite ability to create stimulative dollars). SUMMARY

1. Tariffs add to business costs, which are passed on to consumers, and so, are inflationary.
2. Tariffs reduce competition, thus allowing for higher prices, and so again, are inflationary.
3. By reducing competition, tariffs reduce the motivation to spend on Research and Development of product improvements and new product creation.
4. Tariffs take growth dollars out of the economy, and so are recessionary.

Rodger Malcolm Mitchell Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell; MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell; https://www.academia.edu/

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A Government’s Sole Purpose is to Improve and Protect The People’s Lives.

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